17 December 2012

Foreseeing the Issues in Medicare's Future

originally appeared in The New York Times:

The projected growth of Medicare costs is the single biggest contributor to the country’s long-term budget deficits, many estimates show. No cohort of Americans, with the possible exception of the very affluent, pays enough in Medicare taxes and premiums to cover its eventual Medicare costs.

Much of the early public discussion of the fiscal deadline has focused on taxes, and the decline of tax rates in recent decades has played a crucial role in creating the deficit. But the question of how to reduce the growth of Medicare costs will become increasingly important as the population continues to age and health costs continue to increase.

In the current fiscal talks, Republicans are pushing for significant changes to Medicare, in exchange for agreeing to tax increases. Democrats are arguing that Medicare is not the most pressing budget problem.What follows is a primer on Medicare costs.

Q. Is Medicare really a bigger long-term problem than Social Security or military spending?

A. Yes. Over the next 25 years, the Congressional Budget Office projects that Medicare spending will rise to 6.7 percent of the gross domestic product, from 3.7 percent this year. (Other federal health care spending — like Medicaid, the insurance program principally for low-income families — is projected to rise to 3.7 percent of the G.D.P. in 2037, from 1.7 percent this year.)

In total, health care spending’s percentage of the G.D.P. is expected to rise by five points. Social Security spending is projected to rise by only 1.2 percentage points, to 6.2 percent in 2037. All other federal spending is expected to shrink by two percentage points, to 9.6 percent.

These estimates assume that some current policies continue, rather than that the various tax increases and spending cuts scheduled to take effect on Jan. 1 occur and remain in place.

Q. Why is Medicare the big problem?

A. As much attention as the aging of society receives, the rise of medical costs is a bigger budgetary problem. The faster growth of Medicare costs, relative to Social Security costs, highlights this difference.

Social Security costs will indeed grow in coming years, adding to the government’s fiscal problems. But those costs will not grow nearly as rapidly as Medicare’s, because Medicare costs are a function of both the aging society and the cost of treating any one person. Social Security’s costs stem almost entirely from the number of elderly people.

Q. Don’t most Americans pay for their Medicare benefits, through payroll taxes over their working lives?

A. No, and it is not even close. Two married 66-year-olds with roughly average earnings over their lives will end up paying about $122,000 in dedicated Medicare taxes through the payroll tax, including the part their employers pay, according to the Urban Institute. That married couple can expect to receive about three times as much — $387,000, adjusted for inflation — in benefits. The projected gap is even larger for younger people because of growing health care costs.

In short, the single biggest cause of the long-term deficit is that most people receive much more from Medicare than they give to it.

Q. Why are health costs growing so rapidly?

A. For a good reason and a bad one.

The good reason is that our medical system has made enormous progress in recent decades and can treat conditions that once would have killed people. Cancer treatment and cardiac care are two examples of areas with beneficial new treatments that are often not cheap. An American who turns 65 today can expect to live almost 20 more years on average, up from about 16 years in 1980.

The bad reason is that our health care system wastes large amounts of money. The United States spends roughly twice as much money per person on health care as many other rich countries, without getting vastly better results. Americans receive better care in some areas (some cancers) and worse in others (higher error rates).

It is hard to make the case that the American health system provides a good return on the money it spends. Life expectancy is higher and has grown over the last 30 years in Australia, Britain, Canada, France, Germany and Japan, among other countries.

Q. What are the possible solutions?

A. For starters, we could pay more in taxes. Tax revenues are near a 60-year low as a share of the G.D.P. They will rise somewhat as the economy recovers and incomes increase, but not by nearly enough to pay for growing health care costs.

Covering the future costs of Medicare and Medicaid solely through higher taxes would involve sharp increases — much greater than anything being debated now. So most budget experts believe that changes to Medicare need to be part of the deficit solution.

Among the options are raising the eligibility age, which is now 65; reducing benefits for affluent families; introducing more competition; and paying for quality of care, rather than quantity.

Q. What are the upsides and downsides of each?

A. Let’s take the options one at a time:

The main arguments for raising the eligibility age are that Americans live longer than they used to and that the 2010 health care law makes it easier for people to get insurance if they do not receive it from an employer. The main counterargument is that the longevity increase has been smallest for low-income people, who are most likely to benefit from Medicare coverage.

Reducing benefits for high-income families has some bipartisan support, given the recent increases in income inequality. But some Democrats worry that it could eventually undermine Medicare’s popularity, making it more akin to a welfare program.

Many Republicans advocate for more competition in health care, noting that competition has reduced prices and raised the quality of service in many industries. It has an uneven record of doing so in health care, though, in part because insurers can often profit by denying care.

Paying for quality rather than quantity has support from many economists. But it is not always easy. Patients and doctors often want to proceed with high-cost care even when research has not shown it to be effective.

Q. Does Medicare need to be fixed before Jan. 1?

A. Obviously not. Many potential changes would need to be phased in and would not bring savings for years. Other policy changes, like tax increases, can have a quicker effect on the deficit.

On the other hand, fixing Medicare is never going to be easy. Every budget negotiation between Congress and the president is an opportunity for them to make progress on a fiscal problem that is growing every year.